Bil­lion­aire to cut pay amid cash crunch

LeEco co-founder Jia Yuet­ing apol­o­gizes to share­hold­ers and vows to slow ex­pan­sion

Toronto Star - - BUSINESS -

The bil­lion­aire chair­man of China’s LeEco has ad­mit­ted his tech­nol­ogy em­pire is run­ning out of cash to sus­tain a head­long rush into busi­nesses from elec­tric cars to smart­phones.

In a lengthy let­ter to em­ploy­ees, com­pany co-founder Jia Yuet­ing apol­o­gized to share­hold­ers and pledged to slash his in­come to 1 yuan (20 cents), slow LeEco’s mad­cap pace of ex­pan­sion and move the com­pany to­ward a more mod­er­ate phase of growth.

LeEco is the um­brella hold­ing com­pany for a sprawl­ing fam­ily of busi­nesses that in­cludes sports me­dia, au­to­mo­biles and TVs. The com­pany known for its LeTV stream­ing ser­vice has ag­gres­sively pur­sued fund­ing and bets on new ven­tures, from an elec­tric-car plant in Ne­vada to a $2.7-bil­lion ac­qui­si­tion of Cal­i­for­nia TV maker Vizio Inc.

“No com­pany has had such an ex­pe­ri­ence, a si­mul­ta­ne­ous time in ice and fire,” Jia wrote in a let­ter, ob­tained by Bloomberg, de­scrib­ing LeEco’s rise and sub­se­quent is­sues. “We blindly sped ahead, and our cash de­mand bal­looned. We got overex­tended in our global strat­egy. At the same time, our cap­i­tal and re­sources were in fact limited.”

An­a­lysts have be­gun to ques­tion LeEco’s longer-term prospects, given the opac­ity sur­round­ing in­vest­ments by its var­i­ous sub­sidiaries and a re­liance on eq­uity-backed loans. Shares in Leshi In­ter­net In­for­ma­tion & Tech­nol­ogy Corp. and Cool­pad Group Ltd., the two listed com­pa­nies Jia chairs, were lit­tle changed af­ter Mon­day’s sell-off.

“The com­pany spread it­self too quickly. They have a big am­bi­tion to cre­ate an ecosys­tem for dif­fer­ent de- vices, not only for phones and TVs and set-top boxes but for ve­hi­cles,” said Sandy Shen, a re­search di­rec­tor with Gart­ner Inc. “They have a big am­bi­tion that is too big to swal­low at this mo­ment.”

Jia high­lighted mea­sures to lessen the com­pany’s bur­den in his memo. LeEco will im­me­di­ately be­gin cost­cut­ting pro­grams, de­crease sub­si­dies for cus­tomers and fo­cus on ex­ist­ing busi­nesses in­stead of new ones, he added, apol­o­giz­ing to share­hold­ers of Leshi in re­sponse to crit­i­cism that he hasn’t paid them enough at­ten­tion.

“They def­i­nitely need to cut back quite a bit to sus­tain the cash flow,” Shen said. “Their core busi­ness is still quite strong be­cause they have a lot of good con­tent.”

A self-made bil­lion­aire who got his start work­ing in IT at a lo­cal tax bureau, Jia founded Leshi In­ter­net In­for­ma­tion & Tech­nol­ogy in 2004, one of the first com­pa­nies in China to stream TV shows and movies to pay­ing sub­scribers. He en­tered the smart TV busi­nesses in 2013 and the smart­phone mar­ket in 2015.

But his grow­ing em­pire re­lies on a risky fi­nanc­ing model. Leshi is pub- licly listed on the Shen­zhen Stock Ex­change and the only prof­itable en­tity, ac­cord­ing to Win­ston Cheng, LeEco’s head of cor­po­rate fi­nance. Jia has bor­rowed against his shares in Leshi for cash that he in­vested into his other com­pa­nies, reg­u­la­tory fil­ings show.

That prac­tice has in­vited scru­tiny in the U.S., where Jia is try­ing to get elec­tric car-mak­ing ven­ture Fara­day Fu­ture off the ground. Ne­vada Trea­surer Dan Schwartz has balked at is­su­ing bonds needed to get the pro­ject up, cit­ing doubts about Jia’s abil­ity to raise funds.

Leshi’s stock has plum­meted by al­most a third since the start of 2016. Jia has showed off an elec­tronic con­cept car dubbed the LeSee, and in Septem­ber raised more than $1.3 bil­lion from a con­sor­tium of Chi­nese in­vestors to make it. But in his memo on Mon­day, Jia sin­gled out the car di­vi­sion for its profli­gacy, say­ing it had al­ready spent 10 bil­lion yuan in early devel­op­ment.

“Our fundrais­ing abil­ity isn’t strong,” Jia wrote. “The scale of our ex­ter­nal fundrais­ing had trou­ble sat­is­fy­ing the de­mands of our rapid ex­pan­sion.”

DAVID PAUL MOR­RIS/BLOOMBERG

Jia Yuet­ing pledged to slash his salary to 20 cents due to money trou­bles with his com­pany, China’s LeEco.

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